New SEC Investigation Of Bank of America For Raiding Client Funds

The Wall Street Journal is reporting that the SEC has begun an investigation of Bank of America for violations of rules designed to safeguard client funds.

According to WSJ sources familiar with the investigation, for at least the last three years, Bank of America has undertaken complex trades and loan schemes to save tens of millions of dollars a year in funding costs and to free up billions of dollars for trading that the bank would have had to keep off-limits with out the complex maneuvering.

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More on new Bank of America investigation

The sources note that the SEC is currently investigating whether the Bank of America’s complex trade strategy violated regulations to safeguard customer funds and whether the bank was fully open with regulators regarding its actions.

Of note, BoA apparently halted the strategy in 2012, given internal debate about its potential regulatory and other risks. The trades involved Bank of America’s Merrill Lynch unit.

The SEC inquiry is headed up by a specialized unit focused on complex financial instruments, the sources noted.

The new investigation is just the latest regulatory problem for Bank of America, and, specifically for a division of the investment bank that orchestrated the trade and loan schemes now being investigated by U.S. and European authorities. For example, trades designed to help clients avoid taxes on dividends, at times funded by Bank of America’s federally-insured banking arm. BoA claims it no longer uses that banking unit to fund tax-minimization trades.

The inquiry is looking at Bank of America’s compliance with a rule ensuring that banks and trading firms reserve sufficient cash and highly liquid securities so that, if a major trade threatens failure of the firm, they have the ability repay everything owed to customers.

Keep in mind that the collapse of Lehman Brothers and MF Global over the last few years ended up with a few brokerage customers waiting years for the return of billions of dollars, which led to the strengthening the customer-protection rules.

Statement from BoA

“These transactions, which began at Merrill Lynch before the acquisition by Bank of America [in 2009], received extensive review and approval,” a spokeswoman for the N.C.-based bank noted. “The firm fully complied with the rules designed to safeguard client funds.”